Home > Library > Stable Times > Volume 3, Issue 4  

Hard Sell: Attracting Financial Advisors to Stable Value Funds

It is easy to imagine that financial planner are eager to steer some of their clients' assets into stable value mutual funds now that they are available for the IRA market. After all, a huge chunk of IRA assets represent rollovers from 401(k) plans, where stable value funds are already popular with many investors. And when the stock market fluctuates wildly, as it has this year, any investment that can promise consistently positive returns has inherent appeal.

Ultimately, all of these factors bode well for the success of stable value mutual funds. But as one financial planner explained to listeners at the SVIA 1999 National Forum, it isn't likely that the financial planners, who influence the decisions of many IRA investors, will jump onto the stable value bandwagon overnight.

"There are a number of roadblocks to acceptance in the financial planner community, beginning with the uniqueness of the product," said Greg Curry, a certified public accountant, certified financial analyst, and president of Pillar Financial Advisors. "This is a very new thing for financial planners, who are inundated with new products every day. Being able to cut through the clutter is very important to them."

Curry also noted that financial advisors assume a risk when they introduce any new product to their clients, should that product fail to perform to expectations. Yet they assume almost no risk by not introducing stable value funds, he said, since, for now, most of their clients don't know about them anyway.

Given that most financial planners aren't familiar with stable value funds either, Curry warned that the sponsors of these funds have a hefty educational effort ahead of them. "Financial advisors like to know the inner workings of the products they sell, and right now, they don't have a clue (about how stable value funds work)," Curry said. "This means that the wholesalers and sales people working for fund sponsors will not only have to know this information, but also will have to be able to explain it."

Even if fund sponsors work their way past these roadblocks, Curry warned that financial planners will still want satisfactory answers to a couple of daunting questions before they are inclined to sell stable value funds. Most important: How and where will they get access to the funds, and what trading restrictions will be placed on the funds? If the primary broker-dealer an advisor works through doesn't have access to stable value funds, most advisors won't seek them out on their own, Curry said. As for trading restrictions, he said, financial planners hate them.

"The restrictions we're used to are restrictions that say something like, 'You must stay in this fund for X months or you'll pay a fee," Curry said. "That's easy. I can understand that. But if you tack on something else that planners have to explain to their clients, such as 'if this interest-rate trigger is met, you'd can't pull your money out of your stable value fund when you want to,' they're going to balk. Rate-spread triggers are a difficult hurdle for advisors to overcome."

To date, all of the stable value mutual funds that have been introduced for the IRA market feature trading restrictions that kick in if interest rates spike sharply higher. Under such a scenario, the yields on money market funds would spike up, too, prompting many IRA investors to swap assets out of stable value funds and into money market funds or other higher-yielding securities. The restrictions are designed to prevent that from happening, since it would mean that the funds would have to liquidate their assets at the worst possible time, harming investors who stayed in the fund.

"The education of advisors about the use and appeal of stable value funds is going to be difficult," Curry concluded. "But in the industry's favor, we did some of this work when other synthetic investments first started to appear years ago."

Read Next: Asset Allocation: Age Matters